WA capacity charges – What are they, and how can they reduce my electricity bill

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Western Australia is not connected to the National Energy Market and has its own rules, one of them being WA capacity charges.

WA Capacity charges make up a large portion of Western Australian electricity bills, but businesses can take action to minimise what you pay for the whole year. 

But before we get into how you can get the system to work to your benefit, let’s understand what capacity charges are and how they are worked out.

Australian electricity networks register peak demand in summer

Australia’s climate is generally mild in winter, but as we all know, our summers can be blistering, especially in WA.

This means that we use a lot more electricity for cooling purposes then than we do during Spring, Autumn and Winter. 

Climate and weather patterns have a significant impact on electricity prices, which are very temperature-dependent. 

Think about it. It’s a hot 40-degree day and you have just finished work. If you have a smart home, you would probably set the air conditioning to 18 degrees as soon as you leave work.

If you don’t have a smart home, you would probably get home and turn all the air conditioners on full blast.

Our tendency to use more electricity when it is hot shows how temperature-dependent our electricity grids are.

To put it very simply, for most of the loads on the Western Australian network, there is a strong correlation between higher temperatures and electricity demand. 

Supply must always meet demand

Energy grids were never intended to be two-way highways. They were designed to transport energy from where it is generated to where it is consumed.

The advent of renewable energy kickstarted the change, but one thing must remain constant – the frequency of the grid.

This means that a constant balancing act plays out where supply must meet demand. Australia’s energy network is stable when it runs at a frequency of 50 hertz (Hz).

Frequency changes are registered when the electricity supply does not match consumer demand.

More often than not, small differences between demand and supply are smoothed out by increased supply, but when uncontrolled changes of more than 1 Hz take place, it can cause blackouts.

To ensure that you can come home during the peak of summer and turn your air conditioner on, we have to have the generation capacity sitting there all year round.

If that peak demand cannot be met, the grid could face severe load shedding and blackouts. 

In 2020, peak demand in WA was 3,970 MW of generation. It doesn’t matter how long you need that electricity, that figure has got to be met. 

The difference between the Eastern States and Western Australia

There are two types of electricity markets in Australia, energy-only markets and capacity markets. 

The Eastern States National Energy Market is an energy-only market.

This means that the wholesale energy caps are extremely high at $15,000 per Megawatt hour.

The risk of prices shooting up to the market cap is priced into consumers’ energy rates or retailers may also reserve the right to pass on penalties. 

The WA Wholesale Electricity Market, on the other hand, is a capacity market.

This means that in comparison to the Eastern states, energy price caps are quite low ($350/MW). The caveat is that WA has capacity payments.

WA cannot import energy from other states via an interconnector.

As a result, WA must ensure that there is enough generation capacity to meet peak demand and that all available capacity receives a fixed monthly payment. 

The payment depends on the size of the generator, how much capacity the state needs and how much capacity is available. 

These factors provide investment signals to the market, which allow it to operate efficiently. 

How are my WA capacity charges worked out?

Every electricity meter in WA has a capacity charge. This is worked out according to the said meter’s contribution to peak demand. 

Put simply, the capacity charge distributes the cost of funding generation to meet peak demand on standby all year round to consumers, based on their share of demand. 

The Australian Energy Market Operator benchmarks against the four highest demand days from the hot season between December and March.

It then drills down into the highest 1.5 hours of demand on each of those days. Your consumption for the six-hour total period (1.5 hours x 4 days) is then used to work out your capacity charge.

The system was designed to make Western Australians pay for what they use. But not quite.

How to reduce your WA capacity charges

AEMO’s figures are pointing towards 2023 being another 3,900MW+ peak demand year for Western Australia.

Mitigating your capacity charge is called “peak-shaving” and it essentially means, lowering your consumption during those periods AEMO selects as the benchmarks.

It is a little harder than it sounds because you need to predict when the highest consumption of the year takes place.

There is 1.4 GW of solar in the WA network. 

Solar floods the network during the day, but once the sun sets, demand shoots upward in a phenomenon called the duck curve.

Effectively solar has pushed peak intervals from 2 pm to 6 pm. Peak demand has been pushed back later into the afternoon.

This means that it is easier to predict the time of day that peak demand will occur.

Cloudy days can also push demand higher because the solar output would be negatively affected.

If you combine cloudy conditions with a 40-degree day, you could be looking at a massive load on the network. 

If peak shaving is done correctly, you reduce the overall cost of electricity supply for your business. 

Businesses on unbundled tariffs will see pass-through costs being directly affected. Those on bundled tariffs will experience a situation where retailers reflect the reduction in the costs of supply when recontracting.

How can Leading Edge Energy help?

We can set you up with alerts so you can reduce demand on the peak days to reduce your WA capacity charges.

We can also help you reduce your overall energy consumption by recommending specialised equipment such as soft starter motors, smart lighting, LED lighting and more.

Leading Edge Energy also advises on rooftop solar installation. 

If you are interested in saving on your capacity charges, get in touch by emailing us at info@leadingedgeenergy.com.au or by calling on 1300-852-770.

Why worry about the weather and peak demand when we can do that for you?

Leading Edge Energy is proud to be a signatory of the National Customer Code for Energy Brokers, Consultants and Retailers.